Knock down rebuild: Ultimate guide to knocking down a house and rebuilding

Your dream house might be a resident in your mind’s eye – the house you’re eyeing off might be a ‘fixer-upper’, isn’t using its block space to its potential, or requires so many modifications and renovations it might be worth knocking the whole thing down and starting fresh. 

A knock down rebuild is a tried and tested way to design and build the home you’ve always wanted and an alternative to making renovations to a building that fundamentally doesn’t suit you or your family’s needs. In this article, we’ll explore what a knock down rebuild involves, the costs, the pros and cons of renovations, and how to best finance your knock down rebuild if you decide to press on. 

What is knock down rebuild?

A knock down rebuild does what it says on the tin – it means knocking down an existing dwelling (or structures) and rebuilding something new in its place. That means levelling a block and digging up underground structures. The intention is to build a new house in its place.

How to knock down a house and rebuild?

Knocking down a house requires a demolition crew to demolish and remove all the structures from the block and remediate the land around it for new foundations. During this process, you will have engaged an architect or draftsperson to design a new house or choose one off the plan. Once the demolition is complete, you’ll then need to contract builders to build the new house in its stead. 

The knock down rebuild process

The process begins with council approvals. You will need council approval for a knock down rebuild, or permission from neighbours who may have a covenant on your block regarding development. If you get the green light, you’ll need to find a demolition company, who will then seek a demolition permit. Once approved, you will need to disconnect power and gas through your utility company. The demolition company will also have to cap off the sewer at the main sewer connection point in accordance with local community guidelines. After demolition and remediation, building may commence.

How long does it take?

Depending on complexity and “unforeseen” events such as weather and site issues, it can take about eight to twelve months on average.

Knock down rebuild costs

How much does a knock down rebuild cost?

A knock down rebuild will have three major costs: the demolition, the rebuild, and the administration costs. A demolition will cost about $20,000 to $40,000, depending on the size of the block and any complexities involved, such as asbestos removal, block access, and the age of pipes and essential services. It’s hard to put a pin on the price of designing and building a new home, but this can range from $500,000 on average all the way up to $6-700,000 for a comfortable three-bedroom home. The more space or higher-grade materials you choose, the more expensive it will be.

Hidden costs of knock down rebuilds

The hidden costs of knock down rebuild come in the form of alternative living arrangements – where will you and your family live in the meantime? You may have to rent or lodge with friends or family. Other hidden costs are overruns and unforeseen complications such as weather or complexity that wasn’t accurately accounted for. On the flipside, if your home is of interest to house removers, they may take away the remnants of the house making the demolition process cost neutral. There also may be stamp duty costs if you buy a property to immediately knock it down and rebuild.

How to finance a knock down rebuild?

Using equity to knock down rebuild

If you already have considerable equity in a property, you can use this to refinance the rebuild. If your current home is worth $800,000 and you owe $250,000, you could refinance the original home loan and borrow back up to $390,000 if you want to avoid paying for Lender’s Mortgage Insurance (having less than 20% equity.) The advantage is you can pay for the knock down rebuild in increments – but the drawback is owing interest on the balance as soon as you redraw.

Building and construction loans for knock down rebuild

Another common way to finance a knock down rebuild is taking out a specialist building and construction loan. These loans provide finance in increments, according to certain project milestones. The first tranche of money may be released when the contract is executed, then more when the demolition is complete, and so on. Construction loans are typically interest only for the first 12 months or until you’ve drawn down the entire loan, whichever comes first.

Is it cheaper to knock down and rebuild or renovate?

In many cases, knocking down and rebuilding from scratch is cheaper than renovating an existing dwelling. The cost per square metre to renovate is generally higher than the cost of building new. This covers the building – not the demolition and other ancillary costs that may be involved. 

However, knocking down and rebuilding gives you the opportunity to improve the value of your property by building bigger or making full use of the block space; customising everything to your needs; subdividing and building two dwellings, or other options. Older homes also require more maintenance – and even if you wanted to renovate the entire interior, structural shortcomings and other problems may arise that require even more investment than you budgeted for.

Capital gains tax on knock down rebuild

Capital gains are the difference between the money you make when you sell an asset minus what you paid for it (minus the expenses incurred during the selling process). Your main home is exempt from CGT, unless you’ve used it to earn rent or run a business, or if the house is on more than two hectares of land. The new house you build must also be your main residence for at least three months after and be eligible for the full main resident exemption from the ATO.

Is there stamp duty on knock down rebuild?

As you are not buying a new plot of land for a rebuild, you will not have to pay stamp duty, provided you have lived in the home for at least 12 months prior to the knock down rebuild. 

Knock down rebuild specialists and what to ask them

There exist many companies that specialise in knock down rebuilds. When you have found a few online with good reputations, you should ask them some questions:

• Will you take care of the demolition of the house?
• Can I provide my own external design or do I have to choose off a plan?
• Can you provide a cost and time estimate based on a standard design?
• Do I need to supply my own permits or will your company assist?
• Do you use a standardised process?
• Do you know all the local zoning laws and how to apply for certificates?

Use this in your determination to choose the right knock down rebuilder for your needs.

Before redrawing or applying for credit, talk to a financial professional to discuss whether it’s right for you.